Five Minutes for Finance - Accounts Receivable
Understanding Accounts Receivable
The previous article in this series introduced the concept of accounts payable, the flip-side of which is accounts receivable (AR). This represents money owed to an organization for goods or services it has provided but has not yet received payment for. In the context of nonprofit organizations, AR often stems from services rendered under contractual agreements, grants, membership dues, or pledges from donors. Managing accounts receivable effectively is crucial for maintaining financial health and ensuring cash flow stability.
Key Components of Accounts Receivable in Nonprofits
Grant Receivables: Many nonprofits rely on grants from foundations, government agencies, or other organizations. Once a grant agreement is signed, any portion of the grant that is due but not yet received becomes a receivable. These amounts due might be paid in a single payment or in several installments over the coming months or years.
Membership Fees and Program Service Fees: Nonprofits that offer membership programs or services often bill members or clients. Unpaid invoices for these services contribute to AR.
Pledges: Donors may commit to donating a specific amount over a set period. These pledged donations are recorded as receivables until the funds are received. For purposes of efficiency and simplicity, some organizations set thresholds (e.g. $5,000.00) for pledges. Any pledges below the threshold would not be recorded as revenues or receivables - they would only be recorded as revenue when the payment is received.
Contractual Services: Nonprofits providing consulting, training, or other contracted services may have accounts receivable because the fees for these services are often billed, and paid, after the services have been provided.
Importance of Managing Accounts Receivable
Efficient management of AR is essential for nonprofits to maintain operational stability. Mismanagement can lead to cash flow issues, which may hinder the organization’s ability to deliver on its mission. Here's why AR management matters:
Cash Flow Management: Timely collection of receivables ensures a steady cash flow, enabling the nonprofit to meet its financial obligations.
Transparency and Accountability: Accurate AR tracking enhances financial reporting and compliance, which is crucial for retaining donor trust and meeting regulatory requirements.
Resource Optimization: Efficient collection minimizes the time and resources spent on follow-ups and legal actions.
Best Practices for Managing AR
Timely Invoicing: Issue invoices promptly to minimize delays in payments.
Clear Payment Terms: Communicate payment terms clearly to donors, members, or grantors. These terms specify when the payment is due and any discounts for available for early payment (which are usually rare in the nonprofit sector).
Follow-Up System: Implement a consistent follow-up process for overdue accounts, including reminders and escalation strategies.
Technology Integration: Use accounting software tailored for nonprofits to track AR, automate reminders, and generate financial reports.
Regular Reconciliation: Reconcile AR accounts regularly to ensure accuracy and detect discrepancies early.
Conclusion
Accounts receivable management is a critical financial function for nonprofit organizations. By maintaining accurate records, fostering transparent relationships with stakeholders, and implementing efficient collection practices, nonprofits can secure the financial stability needed to achieve their missions. Proactive management of AR ensures that funds flow smoothly, supporting the organization's operations and long-term sustainability.
About this Series
Subsequent articles in this series will cover other topics related to nonprofit financial management. Here is a list of, with links to, previous articles:
About the Author
For over 30 years, Robert Pascual has been a leader in nonprofit financial management as a CFO, consultant, conference speaker and educator. He holds an MBA from the Haas School of Business at the University of California and is the founder and principal of Robert Pascual, MBA LLC. He has worked with small, mid-size, and large nonprofit organizations spanning the fields of education, workforce development, housing, health, philanthropy, social services, media, fiscal sponsorship, nature, and the environment. Each of these organizations has faced both unique and common challenges, some of which are probably similar to ones that you wrestle with.